This book review originally appeared in the Cayman Financial Review
For six years I’ve told audiences (and even more than a few social acquaintances who would listen) that the 2008-09 Global Financial Crisis was not “The Big One.” In time, people will look back on that episode as relatively minor and fairly short-lived compared to the one we are building toward. Don’t believe me?
Then set aside the time to read the 750 pages of David Stockman’s rant about pervasive cronyism in the U.S. financial and political system. If you are not convinced by his sometimes overly repetitious (and a few times mistaken) rehashing of not only the specific events of late 2008 and early 2009 — but also the flawed arrangements and bad ideas from the Bretton Woods framework 70 years ago and everything in between — you are not going to be convinced until it happens.
Stockman documents that none of the flawed institutional arrangements and erroneous economic theories have been corrected or purged from our economic policy environment, and the mistakes of the past are now being repeated — big time.
In Stockman’s personalized history of the past century, there are very few “good guys.”
The “bad guys” range from Ronald Reagan, Mitt Romney, Milton Friedman and Alan Greenspan on the right, to Paul Krugman and a long list of other economic interventionists on the left. The “Occupy Wall Street” crowd and their political cheerleaders would love his scathing critique of the greedy cronyism of our nation’s financial elites — if only Stockman’s blistering documentation of the misdeeds of financial wizards was not way over the heads of OWS know-nothings.
At times, Stockman treats the villains of his polemic as rather well-intentioned — but wrong-headed — idiots who are dangerous only because their ideas are so bad and they have political influence. Other times his indictments probably would not be sufficient in a fair court of law to lock these people away for a very long time, but Stockman makes it clear that is what he believes should happen. James Madison had noted that if men were angels we would not need government.
We can only guess at whether Madison could have imagined the pervasive incestuousness of current politicians, bureaucrats and financial wizards. Stockman does not do an effective job of explaining what he sees as the design flaws in our political system and institutional arrangements that have allowed cronyism to become so endemic. However, he does conclude with ideas for reform.
Also, Stockman does not make clear (to this reader) that the problem of “too big to fail” is actually a problem of “too politically influential to properly supervise or regulate,” but he does recommend breaking up the biggest financial companies, going back to separation of narrow banking from all other financial services, and limiting the moral hazard of access to the nation’s financial “safety net’ which catches even non-financial companies in a crisis.
Essentially, he is saying that if politicians and bureaucrats are not willing to tolerate market-administered punishment of bad business and investment decisions, then the scope and scale of enterprises needs to be capped by government edict. However, Stockman first convinces his readers that the system has become so broken and corrupted because of the enormous benefits to politicians, then he calls on these politicians to overhaul a system they profit from!
Stockman makes an interesting contribution to an ongoing debate about “income inequality” that deserves the attention of serious academic scholars. His hypothesis is that the behavior of the U.S. monetary authorities — especially the “Greenspan put” — resulted in significant transfer of wealth from middle- and lower-income households to “the 1 percent.” To the extent that central banks believe they can create “wealth effects” by fostering asset bubbles, which are supposed to eventually result in Keynesian consumer demand, altering the distribution of income is an instrument of monetary policies!
This is a very different argument than that put forth by other scholars about increasing concentration of wealth for upper-income households at the expense of the “left behind” middle income. While much ink (so to speak) has been wasted on poor analysis, poor data, and bogus political arguments, the Stockman hypothesis should be thoroughly scrubbed on both theoretical and empirical grounds.
If the unintended consequence of political pressure on discretionary monetary authorities to pursue a “dual mandate” of low unemployment, as well as low inflation, has contributed to a worsening of the political issue of wealth or income inequality, the obvious political hypocrisy cannot be ignored. If “helping the middle class” translates into “the only way to feed the sparrows is to feed the horses first,” Stockman’s rant about the corruption of the political system will be well justified.
A reader who is not already well informed about the political and economic events of the past five decades will need to consult other sources before drawing firm conclusions about what went wrong and who is to blame.
Early on, Stockman hangs “the beginning of the end” on Richard Nixon’s ending of the peg of the U.S. dollar to gold in 1971. A few chapters later, the “original sin” was Lyndon Johnson’s refusal to accept the essential fiscal discipline of the Bretton Woods System1 as he pursued the “guns and butter” policies of the Vietnam war and the Great Society programs. If Johnson broke the system, how is the whole thing the fault of Nixon and his advisors because they failed to restore a pre-Johnson, fundamentally flawed adjustment mechanism? Regrettably, Stockman’s analysis would seem to support the views of those who claim that the only necessary reform is to re-peg the U.S. dollar to a weight of gold and all will be fine. In this, Stockman is making the public choice error he is not generous enough to extend to Milton Friedman.
Friedman provided economic arguments for the expected benefits of steady money growth. Late in life, he came to appreciate James Buchanan’s public choice arguments about why central banks and their political overseers would not tolerate a monetary authority responsible for furnishing a fiat currency to be put on automatic pilot.
The legislated “dual mandate” denies pursuit of non-inflationary monetary policy, and quantitative easing destroys any potential for achieving and maintaining sound money in a discretionary fiat system. The ink was not dry on the articles of incorporation of the Federal Reserve “bankers’ banks” before the link of the dollar to gold was abandoned. Why would Stockman or anyone else believe that next time we peg the dollar to gold, we will mean it and keep it?
Madison chose to start the new country and its new currency as “specie-backed” because he asserted it was dangerous to experiment with unbacked fiat currency until we discovered and implemented institutional arrangements to assure fiscal discipline.
Likewise, Stockman seems to want to return to a gold-backed dollar in order to achieve and maintain fiscal discipline. But, after doing a convincing job of explaining why neither Democrat nor Republican presidents and their congressional allies were willing to live with the essential fiscal discipline when it became politically inconvenient, why the conclusion that “Next Time Will Be Different.”
Some of the things on Stockman’s “to do list” are so obviously desirable as to not need comment. Not so obvious is a 30 percent “wealth tax” to achieve budget balance. It is apparent that Stockman expects this idea to appeal to readers who absorb and share his disdain for the “ill-gotten gains” of the Wall Street fat cats — like Mitt Romney — who happened to be standing in the right place when the central bank’s mistaken monetary policies rained riches on financial institutions and their top management and shareholders. It is hard to argue that riches resulting from crony political connections are in any way deserved.
But, how does Stockman propose to exempt the true wealth creators from his confiscatory wealth tax? The world is a more prosperous place because of Microsoft, Apple and Google and their leaders and investors.
Why hit them? Being offended or even angry that Goldman Sachs executives and investors got rich because of government/central bank policies and actions is not sufficient reason to punish the good guys.
1 Readers of Stockman’s book would be well advised to also read Benn Steihl “The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order,” before drawing firm conclusions about the Bretton Woods grand scheme.